May 4, 2017 / 4:36 PM / 3 months ago

Fitch Affirms 4 Georgian Banks

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(The following statement was released by the rating agency) MOSCOW/LONDON, May 04 (Fitch) Fitch Ratings has affirmed Bank of Georgia (BoG, BB-/Stable), TBC Bank (BB-/Stable), ProCredit Bank (Georgia) (PCBG, BB/Stable) and Liberty Bank (LB, B+/Stable). A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS AND SENIOR DEBT The Issuer Default Ratings (IDRs) of BoG, TBC and LB are driven by the banks' intrinsic strength, as reflected by their Viability Ratings (VRs). The ratings consider the banks' reasonable asset quality metrics supported by the stabilised economic environment and currency exchange rate, their adequate capitalisation and stable funding profiles. The Stable Outlooks on the ratings reflect Fitch's view that the banks' pre-impairment profitability should absorb potential asset quality impairment without losses eroding capitalisation. PCBG's IDR is driven by moderate probability of support from the bank's majority shareholder, ProCredit Holding AG & Co. KGaA (PCH, BBB/Stable). VIABILITY RATINGS BoG BoG's asset quality metrics remain adequate, notwithstanding a moderate uplift in non-performing loans (NPLs, overdue above 90 days) to 4.1% of total gross loans at end-2016 from 2.8% at end-2015. The coverage of NPLs at end-2016 was a reasonable 82%. Restructured exposures made up further 6% of loans including a big restructured loan (4% of gross loans) booked at BoG's holding company JSC BGEO Group. However, the volume of NPLs and restructured exposures net of reserves equalled a moderate 35% of Fitch core capital (FCC), with risks further mitigated by good collateral coverage. Potential credit risks may also stem from high loan book dollarisation (68%), with borrowers being largely unhedged and significant borrower concentration. The top 25 groups of borrowers accounted for 22% of the bank's gross loan book at end-2016 or 1.2x FCC. However, recent lari appreciation (8% in 2017) should support loan performance. The FCC ratio stood at a moderate 15.1% at end-2016, down from 17.2% at end-2016, as growth outpaced capital generation. Regulatory Tier 1 CAR was a lower 9.1%, pressured by a punitive 175% regulatory risk-weights for foreign-currency loans, and early payment of GEL100 million dividends to the holding company (adjusted for these, the bank's Tier 1 CAR would be 10.1%). Fitch expects that the bank's capital ratios should not decline any further, given moderate growth plans and good earnings expectations. Bank's capital cushion allowed BoG to absorb a small 1% of gross loans before breaching regulatory minimum capital ratios at end-2016. However, loss absorption capacity is still solid given BoG's pre-impairment profits of 7.7% of average gross loans in 2016. Bank's overall net profitability metrics remain sound (23% ROAE in 2016), supported by healthy margins, good operating efficiency and only moderate loan impairment charges. BoG's funding profile benefits from well-established market franchise. The bank is dominantly funded by customer deposits (61% of total liabilities at end-2016), which are moderately concentrated. The top 10 largest depositors at end-2016 comprised 29% of corporate funds, or 13% of total customer accounts. The risks are mitigated by the bank's good liquidity buffer - at end-2016 liquidity cushion (net of obligatory reserves) comprised about 15% of total assets, covering 27% of total customer deposits. The bank's refinancing risks are low, and wholesale repayments in 2017 make up a relatively small 5% of BoG's liabilities. TBC TBC's asset quality metrics remained sound with NPLs equal to 1.3% of gross loans at end-2016 (end-2015: 1%), fully reserved. Restructured exposures declined to 3.9% in 2016 from 4.7% in 2015, while the reserve coverage of NPLs plus restructured loans was a moderate 60%. The unreserved portion of these amounted to a moderate 10% of FCC. The dollarisation of the loan book was a high 66%, which is typical for the market. The loan book is moderately concentrated. The top 25 groups of borrowers made up 83% of FCC. TBC's FCC ratio declined to 21% at end-2016 from 25% at end-2015, as the risk-weighted assets inflated due to local currency depreciation and consolidation of Bank Republic. Regulatory Tier 1 CAR was a tighter 10.4% due to conservative 175% risk weighting of foreign currency loans and regulatory deductions of investments in Bank Republic, potentially allowing TBC to additionally reserve 3.5% of loans before breaching the regulatory minimum. Pre-impairment profit is robust (7% of loans) offering a good buffer against potential asset quality deterioration. Net profitability is also sound (ROAE of 22%) in line with the bank's growth, thus preserving capital ratios. Funding was mainly sourced from customer deposits (70% of total liabilities), about 30% of which were interest-free current accounts. TBC's ratings also consider an only moderate liquidity buffer net of potential wholesale and CBR/government repayments, allowing the bank to withstand an outflow of only 6% of customer accounts. Funding from foreign banks and IFIs made up 15% of total liabilities at end-2016. However, medium-term repayments are manageable (4% of liabilities in 2017 and 5% in 2018). PCBG PCBG's NPLs declined to 1.5% of gross loans at end-2016 from 2.3% at end-2015 due to sale of GEL100 million loans in December 2016. NPLs were fully reserved. Restructured exposures also dropped to 6% from 10%. We note the potential risk from the significant dollarisation of the loan book (85% at end-2016) - the highest among Fitch-rated banks in Georgia, while the share of naturally hedged borrowers was limited. The loan book is moderately concentrated. The 25 largest exposures were equal to 74% of FCC at end-2016. The FCC ratio improved to 19.3% at end-2016 (end-2015: 17.8%) driven by moderate ROAE of 13% in 2016. PCBG plans to distribute 50% of its net income as dividends, but this should not affect the bank's capitalisation due to conservative growth. Regulatory Tier 1 CAR was a tighter 11.2% due to punitive risk-weighting of foreign currency loans, allowing the bank to additionally reserve moderate 5% of loans. Pre-impairment profitability provided additional loss absorption capacity of 5% of average loans. PCBG is mainly funded by customer deposits, which amounted to 61% of total liabilities at end-2016. These have been relatively stable through the cycle. The concentrations are moderate. The 20 largest depositors accounted for 15% of total customer funding at end-2016. Funding from related parties comprised further 17% of liabilities at end-2016. PCBG's liquidity cushion (net of obligatory reserves) is strong, covering 45% of customer deposits. LB LB's asset quality metrics are good. The retail NPL origination rate (defined as the increase in NPLs over the year plus write-offs, divided by the average performing loans) in 2016 was only 3%, down from 5% in 2015, which is notably below the bank's breakeven loss rate (defined as the pre-impairment profit, divided by average performing retail loans) of 10%. The stock of NPLs on the bank's balance sheet increased to 9.5% at end-2016 from 7.6% at end-2015, due to changes in bank's loan write-off policies, but these were fully covered by reserves. Also positive for asset quality, in contrast to market practice, LB issues loans mainly in local currency. The share of foreign currency loans at end-2016 was a low 3% of total. In 2016 the bank reported a record high 32% ROAE, underpinned by wide net interest margins (NIMs), stable commission incomes and reduced cost of risk. Fitch expects the bank's margin to decline by 1-2 pp in the medium term due to the intensified competition and the recently introduced regulatory maximum effective interest rate, although it should still report strong double-digit ROAE in 2017. As a result of muted growth and good internal capital generation, LB's FCC ratio improved to 18.3% at end-2016 from 12.8% at end-2015. The regulatory Tier 1 CAR was 12.4%, potentially allowing LB to absorb 4% of losses without breaching regulatory capital requirements. LB's customer deposits (91% of liabilities at end-2016) are stable, but rather expensive and potentially price sensitive. Liquidity risks are mitigated by a significant cushion of liquid assets (45% of total assets at end-2M17), covering almost 60% of customer accounts. There is a track record of good performance and Fitch's base case expectation is that there will be no radical shifts in the bank's business. However, there is some uncertainty over the bank's future strategy and governance, as the majority stake in the bank, previously pledged, after it was foreclosed, went under control of three new private shareholders. SUPPORT RATINGS AND SUPPORT RATING FLOORS The affirmation of BoG's, TBC's and LB's '4' Support Ratings and 'B' Support Rating Floors (SRFs) reflects Fitch's view of the limited probability of support being available from the Georgian government, in case of need. This is because although the authorities would likely have a high propensity to support these banks in light of their systemic importance/social function, the ability to provide support, especially in foreign currency, may be constrained due to these banks' large foreign currency liabilities (USD5.0 billion at end-2016) relative to sovereign reserves (USD2.8 billion). PCBG's Support Rating of '3' reflects Fitch's view that PCH's propensity to provide support to the subsidiary is high, but PCBG's ability to receive and utilise this support could be restricted by transfer and convertibility risks, as reflected by Georgia's Country Ceiling of 'BB'. RATING SENSITIVITIES Rating upside for BoG, TBC and PCBG is limited, as the former two are already at the same level as the sovereign, while the latter is constrained by the Country Ceiling. Upside potential for LB's rating is also limited, although a material strengthening of bank's franchise and ruling out the uncertainties regarding bank's future strategy, while maintaining decent asset quality, strong profitability and capitalisation metrics, would be credit positive. Downgrades of the IDRs and VRs of BoG, TBC and LB, as well as PCBG's VR, may result from rapid growth or a marked deterioration of asset quality, leading to a substantial weakening of the banks' capitalisation. PCBG's Long-Term IDR is sensitive to changes in Fitch's assessment of support from PCH and to a change in Georgia's Country Ceiling. The rating actions are as follows: Bank of Georgia Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BB-'; Outlook Stable Short-Term Foreign- and Local-Currency IDRs: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B' TBC Bank Long-Term Foreign-Currency IDR: affirmed at 'BB-'; Outlook Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B' ProCredit Bank (Georgia) Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BB'; Outlook Stable Short-Term Foreign- and Local-Currency IDRs: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '3' Liberty Bank Long-Term Foreign-Currency IDR: affirmed at 'B+'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'B' Viability Rating: affirmed at 'b+' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B' Contacts: Primary Analyst Alyona Plakhova Associate Director +7 495 956 2409 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Konstantin Alekseenko Analyst +7 495 956 3003 Committee Chairperson Alexander Danilov Senior Director +7 495 956 24 08 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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